Wealthy, Aging Europe Isn’t Quite Finished Yet

It’s hard to be an optimist these days — especially in wealthy, aging Europe, where pessimism prospers. A decade on from Brexit, the European Union remains admirably cohesive, especially after the departure of Hungary’s Viktor Orban. But its core powers are struggling.

Wars in Ukraine and the Middle East are grinding on while inflation and unemployment rise. The bloc’s so-called misery index, a combination of consumer-price increases and the jobless rate, is at its highest point since early 2024, even if it that’s well below the pandemic shock. Populist parties are snapping at establishment heels in countries including France, where elections are due next year.

And while the EU has begun to talk the talk on reindustrialization, rearmament and tech sovereignty in response to a wayward American ally, walking the walk is another matter. Without profound change, a widening gap in yearly gross domestic product with the US could hit €7 trillion ($8 trillion) by 2040, according to Bloomberg Economics. Yet ex-Italian Prime Minister Mario Draghi’s heralded competitiveness reforms gather dust as weak leaders fight to keep voters onside. “We all know what to do,” Brussels chief Jean-Claude Juncker once said. “But we don’t know how to get reelected once we’ve done it.”

Still, the gloom can go too far. There are reasons for optimism, as my Bloomberg News colleagues’ story on Europe’s recent fitful advances · shows. Yes, this isn’t a utopian “Big Bang” that combines deeper fiscal integration, a defense union and an avid take-up of Draghi’s structural reforms. It is something, though.

The EU has survived the schism of the 2016 UK referendum and won over some of its harshest critics, from outsiders to recalcitrant rock-throwers inside the tent. Most Brits regret their departure and want closer ties again. A post-Orban Hungary is returning to the fold with €16.4 billion in EU funds at stake. Poland is one of the fastest-growing and most pro-EU economies. While the far right is ascendant, today’s Marine Le Pens no longer want to quit the bloc.

US President Donald Trump’s mafia-boss act has concentrated minds, as has his bromance with Russian warmonger Vladimir Putin. Continental public opinion now favors more spending on weapons, especially ones made at home. Germany has abandoned its cherished debt brake to assume the lead part as Europe’s military bastion. The self-anointed “middle powers” are stirring. Canada under Mark Carney sounds more and more like a card-carrying EU member.

There’s economic resilience, too. Euro-area unemployment is still roughly half what it was a decade ago. Then there is what Emmanuel Macron calls Europe’s “reliability” in trade, investment and the rule of law. Trump is many things; dependable is not one of them. A closer relationship between the EU and the CPTPP Asia-Pacific trade pact could even create a third pillar of global trade to rival America and China, according to HSBC Holdings Plc.

Another important shift is that countries are ever more willing to take risks and carve out smaller alliances within the EU to break free of the torturous decision-making that’s kept the single market from closer union. A recent breakthrough by six of the bloc’s biggest economies —  Germany, France, Italy, the Netherlands, Poland and Spain — on capital-markets integration is positive for a process that’s gone nowhere for decades.

To match the might of Wall Street, the EU must nudge trillions of euros of household savings out of low-yield bank deposits and into the stock market. If it works, this smaller “E6” grouping might turn its attention to defense, artificial intelligence and nuclear energy.

The private sector is doing its bit. The campaign for industrial champions has suffered failures such as the battery maker Northvolt and the scrapped Franco-German next-generation fighter jet. And yet there’s momentum behind cross-border deals such as UniCredit SpA’s tilt at Commerzbank AG, and domestic moves to streamline markets like the sale of French mobile operator SFR. Regulators and politicians just need to get out of the way.

In AI, Europe lacks global players other than chipmaking-equipment firm ASML Holding NV. Nonetheless it could profit from the billions of dollars pouring into data centers, and its industrial giants are cashing in on selling basic equipment. Bloomberg Intelligence reckons AI-exposed European stocks will lift their earnings per share by more than a quarter over the next two years.

As to whether this will spark more dynamism in France and Germany, the core nations struggling with weak growth and political chaos, the jury’s out. The far-right AfD is on course to take power in a German state for the first time this year, while Le Pen’s National Rally is on track to win the French presidency.

Hence why, longer term, there’s really no alternative to biting the bullet of serious reform to withstand the pressure of US abandonment and China’s cheap exports. Thankfully, there are glimpses of Europe’s tired democracies rousing themselves. A reform of Germany’s private pensions will come into effect next year and that could flood the region’s capital markets with new cash, according to Deutsche Bank AG. Berlin is also said to be open to tougher action against a surge in Chinese goods undercutting local industry.

Not quite the full Draghi, but it’s a start.